But for clever investors, there’s a conflict: Oil-company stocks, hurt by a 50% drop in the price of crude, are now more attractive than they’ve been in years.

On Monday, we discussed a simple way to play oil stocks if you think the commodity is headed higher, based on companies’ book values. Chevron Corp.
CVX, +0.56%
with a market value of $206 billion, was among the 10 cheapest large-cap North American integrated-oil companies and producers. ExxonMobil Corp.
XOM, +0.77%
at $364 billion, is even larger. It’s safe to say those dominant energy companies, among others, eventually will rebound, enriching investors.

“Oil looks like it has bottomed,” Bob Phillips, managing principal at Spectrum Management Group, said in an email exchange Wednesday. “There have been seven major oil bottoms since oil futures first started trading in 1983 (measured by an oil decline of 40% or more). The average gain in oil 12 months after a massive decline is 73%. Oil is now up 23% from the March 17 bottom.”

Still, Phillips said investors deciding whether to jump into oil stocks “need to take into consideration the huge overhang in supply we have right now. It is off the charts in terms of history.”

But if you can commit for three to five years, “it’s worth considering taking positions now in the high-quality, strong-balance-sheet companies like ExxonMobil and Chevron,” Phillips said. A catalyst besides rising oil prices is acquisitions. Big companies will be able to buy foundering or smaller ones at bargain prices.

Dividend increases are likely

ExxonMobil and Chevron are included in the S&P 500 Dividend Aristocrats, a list of more than 50 S&P 500 stocks that have raised their dividends for at least 25 consecutive years.

And this year looks like no exception, despite the effect of lower oil prices on earnings. According to Eric Ervin, CEO of Reality Shares, energy companies in the S&P 500 paid out about $42 billion in dividends last year. And they spent $44 billion on share buybacks. That gives them plenty of cushion to lower their stock repurchases this year to free up cash to maintain or raise dividends.

“Looking back at the oil-price shock of 2008, when the price of crude oil fell by 68%, energy-sector companies actually increased dividend payouts the following year,” Ervin said in an interview.

Ervin manages the Reality Shares DIVS ETF
DIVY, +0.74%
which was opened in December. The ETF is designed to benefit when large-cap companies increase their dividends, while hedging against stock-market volatility.

“Over the past 15 years, dividends have grown on average about 8% a year, with about half the volatility of the stock market,” he said. So the fund “won’t capture huge stock-market growth, but dividends have only declined three times over the past 43 years,” making it a conservative component for an investment portfolio.

Exxon pays roughly $11.7 billion in dividends a year, and has had about $3 billion in buybacks over the past 12 months, Ervin said.

ExxonMobil pays a quarterly dividend of 69 cents for an annual yield of 3.16%, based on Wednesday’s closing price. The shares have risen 5% since hitting a low March 27. Chevron pays $1.07 a quarter, for a yield of 3.91%. The stock is up 8% from March 13’s low.

Yields above 3% are high these days, given that the 10-year U.S. Treasury note
TMUBMUSD10Y, +0.00%
pays less than 2%.

Philip
van Doorn

Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

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Philip
van Doorn

Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

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